Raising Audit Quality...Raising Audit Quality Through Challenging Times Ms Kuldip Gill Divisional...
Transcript of Raising Audit Quality...Raising Audit Quality Through Challenging Times Ms Kuldip Gill Divisional...
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Raising Audit Quality Through Challenging Times
Ms Kuldip GillDivisional Director
Public Accountancy DivisionAccounting and Corporate Regulatory Authority
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Disclaimer
These slides are not to be cited, copied or circulated without express permission from Accounting and Corporate Regulatory Authority (ACRA).
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Agenda
1. Scope of Practice Monitoring Programme
2. Firm-level Inspection findings
3. Engagement Inspection findings
4. Trends Moving into the New Norm
5. Key Messages
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Scope of Practice Monitoring Programme
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Scope of Practice Monitoring Programme
Firm-level Inspections Engagement Inspections
▪ Inspect audit firms’ quality controls, incorporating thematic reviews
▪ Inspect audit engagements performed by public accountants (PAs)
▪ Applies to firms that audit listed companies ▪ Applies to PAs who audit:- Listed entities- Non-listed entities
▪ Assessed based on Singapore Standard of Quality Control (SSQC) 1
▪ Assessed based on Singapore Standards of Auditing (SSAs)
▪ Advisory basis ▪ Mandatory under Accountants Act
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Firm-level Inspection findings
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Firm’s Quality Control - Six elements of SSQC 1
SSQC 1Leadership
Ethics and Independence
Client Acceptance and
Continuance
Human Resource
Engagement Performance
Monitoring
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Leadership – Tough situations call for tough measures A set of audit quality
drivers in assessment criteria
Performance ratings for individual engagements supported and have clear linkage to overall appraisal
Clear prominent weightage of audit quality drivers on evaluation and compensation
Performance evaluation
Need for clear linkage between audit quality and performance evaluation and compensation
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Ethics and Independence - Compliance with ethical requirements is non-negotiable
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Acceptance and Continuance – Continuous Assessment
• A robust evaluation process serves as first line of defence
• Client acceptance and continuance process should not be treated as merely administrative in nature
• Consider amongst other factors :• Engagements beyond auditor's capacity and/or capability
• Difficulty in fulfilling responsibilities relating to opening balances, as required by SSA 510 Initial Audit Engagements - Opening Balances
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Human Resources – Sufficient professional strength with relevant skills and experience are imperative to deliver quality audits
• Staff turnover beyond normal levels is disruptive:• Loss of knowledge and
experience
• Inability to recruit suitably qualified replacements
• Equipping new staff with necessary skills and knowledge
• Firms to:• continue to review human
resource management policies to remain relevant, attractive and effective in improving staff retention rates
• ensure healthy staff leverage ratios
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Human Resources – Continuing Professional Development • To cope with the evolving challenges in the environment
• continuously upskill audit personnel
• current essential training topics could focus on going concern assessments, audits of accounting estimates, professional scepticism
• On-the-job coaching • effective mentoring of staff
• provide sufficient “touchpoints” and guidance
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Engagement Performance – Audit quality is doing the right thing when no one is looking
Examples of measures implemented by firms
Full “paperless” modes to house all audit evidence on firms’ audit software
Implemented firm-wide policies of shorter archival timeframes of < 60 days
Integrated the more stringent archival deadlines into the auto-archival functions of their electronic audit tools
Configured proprietary audit tools to send timely reminders for archival in accordance with stricter firm policies
Partners should be held accountable for assembly and timely archival of the engagement files; Consider repeated archival lapses as significant impact on partners’ evaluation
Repeated lapses in archival of audit working papers
• late archival of audit working papers
• incomplete assembly of audit working papers
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Monitoring –A robust monitoring system is one of the cornerstones of an effective system of quality control Thorough and
robust Root Cause Analysis
(RCA) framework
Granular –establish
underlying causes and tailor focussed
remediation plan
Timeliness – set deadlines on the
RCA process
Involvement -staff of all levels,
and if appropriate,
EQCR and other quality team
members
Ensure consistency -
Experienced and preferably
centrally-led RCA team
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Audit Quality Indicators (AQIs)
•ACRA’s AQI Disclosure Framework – introduced 2015, revised Jan 2020• enhance discussions on audit quality matters
• provides industry average and ranges to facilitate industry comparison
•ACRA encourages:• Firms: share AQI data with audit committees to allow for meaningful analysis
and discussions
• Audit committees: request AQI data from audit firms • assess the firms’ quality
• facilitate conversations on audit quality matters and monitoring over the auditors’ work
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Engagement Inspection findings
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Analysis of Engagement Inspection Findings
ACRA’s common inspection findings by themes
Top 5 themes of findings from IFIAR’s 2019 Survey of Inspection Findings
Accounting estimates, including fair valuemeasurement
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Revenue recognition √
Group audits
Risk assessment and audit evidence
Audit report
Recurring findings in the areas noted indicate that the remediation efforts need to be more targeted
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Accounting estimates, including fair value measurement• Broad theme affecting various financial statement line items
• Nature of estimates varying widely, often involving management’s judgements and significant assumptions/ complex models
• Significant judgments and assumptions made by management – to evaluate of possible management bias
• Revised SSA 540 Auditing Accounting Estimates and Related Disclosures - consideration of recent developments in the business environment
• Consider impact of COVID-19 when assessing significant estimates
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Accounting estimates, including fair value measurement– Possible best practices• Robust qualitative risk assessment
• Designed further audit procedures – considered the nature, complexity and subjectivity involved in making those estimates
• Strong challenge on management’s assumptions • Led to changes where assumptions were assessed as not reasonable
• Close involvement in work of internal specialists and experts• Clarity in extent and scope of work of specialists/experts• Close involvement in benchmarking key assumptions
• Defer signing off auditor’s report • Ensure key audit evidence obtained and reviewed • Ensure robust quality control procedures completed
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Revenue recognition
• Common/recurring findings:• Lack of understanding of terms and conditions of contracts• Lack of understanding of arrangements and the impact on the accounting of
revenue• Inadequate/ineffective cut-off procedures
• Good practice• Effective use of analytic techniques in auditing revenue• Ensure management performs detailed assessment on impact of
implementing FRS 115 for auditor’s evaluation
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Group audits
• Group auditor’s summary on the review of the component auditor’s work • Inadequate details of component auditor’s work performed on significant
risk areas
• Group auditor placed reliance on the components’ audited financial statements and group reporting deliverables
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Group audits (cont’d)
• Good practices observed include: • well-evidenced risk assessment and scoping of procedures at
a component level • close involvement of group auditors in the direction and
review of component auditors’ work• minutes on discussions with component auditors
• robust documentation • matters that the group auditor considered in evaluating the adequacy of
the component auditors’ work • how the component auditor’s basis for any conclusions made were
challenged
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Auditor’s Reports
INDEPENDENT AUDITOR’ S
REPORT
Omission to opine on the group FS for a consolidated set of
accounts
Basis for opinion paragraph unclear -> users of FS may not be able to understand how the
auditor’s conclusion was reached
Lack of assessment on the type of opinion
Omissions of certain responsibilities of the auditor in the auditor’s report would not diminish the auditor’s fundamental responsibility
Critical to take due care and ensure the accuracy and completeness of the auditor’s report issued, as this is the ultimate deliverable “owned” by PAs
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Trends Moving into the New Norm
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Old Wine in New Bottles
• Audit profession is familiar with two fundamental SSAs• SSA 500 Audit Evidence
• SSA 230 Audit Documentation
• SSAs are principles-based• Exercise professional judgement and maintain professional scepticism
• Increasing reliance on technology in conducting audits• Auditors need to adapt and move away from traditional methods of auditing
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Embracing Technology
• Challenges raised by profession in the adoption/use of technological tools in audits• View: auditing standards are silent on the acceptance of new techniques as audit
evidence
• Regulators encourage transition to technology-based audits and innovation• Premise: Auditors to ensure audit quality is not compromised• Replace conventional audit procedures vis-à-vis supplement audit evidence
obtained through traditional means • Use of technological tools does not replace the professional evaluation, judgement
and scepticism expected of an auditor
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Embracing Technology (cont’d)
• Increasing use of data analytics (DA)• procedures and analysis on large or complex datasets
• allow more informed judgement to be made in risk assessment
• focus efforts on outliers/exceptions and higher-risk areas
• Audit teams must:• be clear on objective of DA tests
• ensure data accuracy, completeness and relevance
• understand tools used, including their capabilities and limitations
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Cybersecurity Risks
• Technology presents both opportunities and cybersecurity threats
• Need for robust understanding of the entity’s cyber environment • Significant risks requiring special audit consideration, eg. involvement of
subject matter experts
• Concerns over data confidentiality and protection against data loss
• Be cognisant that breaches may have occurred but remain undetected• Auditors need to be adequately equipped to identify and appropriately deal
with cybersecurity issues
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Going Concern Assessment
• COVID-19 had created significant heightened public interest and scrutiny over the appropriateness of going concern assumption
• Critically challenge management’s assumptions about the future• exercise due care and heightened professional scepticism, consider both
negative and possible factors, seek independent consultations, engage experts (as necessary)
• events or conditions that trigger the need for management to extend its going concern assessment beyond 12 months
• Review adequacy of financial statements disclosures
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Fraud and Professional Scepticism
• COVID-19 implications on auditors’ work and audit quality• volatile market conditions give rise to greater manipulation of financial
information • greater challenge in assessing whether companies’ financial projections are
viable or biased
• Auditors should consider all information obtained • internally- or externally-sourced, corroborative or contradictory in nature • ensure that one is not biased towards one information source over others• do not dismiss any contradictory information• critically evaluate management bias
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Expectation gap
• Auditor’s role and responsibilities • perceived by public vis-à-vis requirements under auditing standards
• IAASB’s Discussion Paper “Fraud and Going Concern in an Audit of Financial Statements: Exploring the Differences Between Public Perceptions About the Role of the Auditor and the Auditor’s Responsibilities in a Financial Statement Audit” issued in September 2020• gather perspectives from stakeholders about the role of the auditor
• obtain input on matters about the related extant auditing standards
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Expectation gap (cont’d)
• Collective responsibility of all stakeholders in the financial reporting ecosystem
• Timely to clarify individuals’ responsibilities • Consider threat to auditor’s independence, management and preparers need to
take greater ownership of their financial reporting and accounting judgements
• Right balance of responsibilities and reinforce the right perceptions and attitudes
• Collaborative relationship needed between companies and their auditors-build public trust and investor confidence
• All stakeholders to work together to narrow the expectation gap
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Key Messages
• Embed a culture of quality
• Continuously upskill to keep up with rapid changes in the environment and confront new challenges
• Leverage technology to transform the value of audits
• Uncertainties in the environment calls for heightened professional scepticism
• Need to address “expectation gap” of auditor’s responsibilities
• Collective responsibility - All stakeholders to work together to narrow the expectation gap
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Thank you